10 Finance

Errors in capital budgeting decisions

• tend to average out over time.
• decrease the firm's value.
• are diminished because the time value of money makes future cash flows less important.
• are easily reversed.

Which of the following factors is least important to capital budgeting decisions?

• The time value of money
• The risk-return tradeoff
• Net income based on accrual accounting principles
• Cash flows directly resulting from the decision

Which of the following would be considered a capital budgeting decision?

• Walmart purchases inventory for resale to customers.
• Pfizer develops a new therapy and brings it to market.
• Apple sells bonds and uses the proceeds to repurchase stock.
• Goldman Sachs obtains short-term loans to finance day to day operations.

Project January has a NPV of $50,000, project December has a NPV of $40,000. Which of the following circumstances could make it possible to choose December over January?

• January has a shorter payback period.
• The projects are mutually exclusive.
• The projects have unequal lives.
• The projects are mandated.

A new forklift under consideration by Home Warehouse requires an initial investment of $100,000 and produces annual cash flows of $50,000, $40,000, and $30,000. Which of the following will not change if the required rate of return is increased from 10% to 12%.

• The net present value.
• The internal rate of return.
• The profitability index.
• The modified internal rate of return.

When various capital budgeting techniques rank mutually exclusive projects differently, which of the following is theoretically most reliable?

• Equivalent annual cost (EAC).
• IRR
• NPV
• Discounted payback

Which of the following techniques might be useful in situations where mutually exclusive projects have unequal lives?

• Equivalent annual cost (EAC).
• IRR
• NPV
• Discounted payback

Which of the following techniques places the greatest emphasis on cash flows received early in the life of a project?

• IRR
• NPV
• PI
• Payback

Which of the following techniques will always produce a single rate of return estimate?

• IRR
• MIRR
• PI
• Discounted payback

Which of the following best explains the continuing popularity of the payback method?

• Mathematical simplicity and some insight into the riskiness of cash flows.
• Uses all cash flows and takes into account the time value of money.
• Reliably selects the projects that add most value to the firm.
• It provides objective selection criteria and is taught as the primary method in most business schools.